How middlemen mucked things up

Columbia professor Kathryn Judge argues that Amazon and Walmart are merely two examples of a type of corporate power that sickens the whole economy.

The CSA memberships at Siena Farms in Sudbury are an example of direct exchange between producer and consumer. Columbia law professor Kathryn Judge argues that other segments of the economy also would be healthier with fewer middlemen.Jessica Rinaldi/Globe Staff

It’s well known that the meltdown in the market for home mortgages wrecked the economy in 2007 and ’08, but what caused the meltdown? Too many layers of middlemen, argues Kathryn Judge, a law professor at Columbia University. And Judge says the same phenomenon explains massive recalls of tainted ground beef, the erosion of American manufacturing, and why the supply chain for everything from furniture to electronics is out of whack today.

In her new book, “Direct: The Rise of the Middleman Economy and the Power of Going to the Source,” Judge makes the case that having too much separation between buyers and producers makes markets fragile and overly opaque to consumers and regulators. Consider real estate. Once, banks directly loaned money to home buyers and held the mortgages; eventually, loans got sold and resold into complex bundles of securities that can mask dangerous dynamics in the market. Once, you could have bought ground beef that came from a single animal slaughtered not far away; now a package of hamburger might be made up of meat from so many sources that a bad batch is difficult to pinpoint.

Judge acknowledges that big-box stores, contract manufacturers, real estate agents, and other middlemen generally began by adding value to the flow of goods. But many of these intermediaries, she says, have amassed so much power that they have warped consumer behavior and reduced accountability for labor standards and environmental harms. She thinks the solution is for consumers to embrace exchanges that are as close to direct as possible — from farmers markets to Etsy — and for regulators make such transactions more available and affordable.

This interview has been condensed and edited.

Middlemen seem inevitable. I can’t buy your book directly from you. And I don’t think my local bookstore buys it directly from your publisher. But that’s not necessarily bad. How do we know when the middleman chain truly becomes too big?

This is a key distinction. The book is looking at the two extremes — direct exchange and complex supply chains. Even a little direct exchange reminds us that all of our actions really do affect other people in other places. The other extreme shows how the rise of giant middlemen and long supply chains adds fragility and undermines accountability. And part of my aim is to say: Once we understand these two extremes, we understand how much is at stake.

The goal is not a world without middlemen. The goal is a rebalancing, and what that rebalancing looks like is going to depend on the sector. Realistically, cellphones are always going be a product of a pretty long supply chain. But technology is also enabling new types of platforms that can facilitate small production and individual consumption and some sense of connection — something like Etsy. And then ideally, we would perpetuate the policies that make it easier when people want to opt out of the dominant system.

Kathryn Judge, author of “Direct: The Rise of the Middleman Economy and the Power of Going to the Source."Samantha Rayward

What kinds of policies do you have in mind?

One of the policies that I love is that you can oftentimes use government food benefits to go to a farmers market. And that makes a huge difference. People actually change their eating habits when they shop more often at farm stands and CSAs [community-supported agriculture programs]. This also means setting aside public spaces where you’re going to have craft fairs or art fairs. Those are going to be small-scale relative to the magnitude of the problem, but the idea is to allow more points of direct connection.

Another example: Amazon and Walmart have their own fleets of trucks. Right now they’re doing a great job using their market position to make sure that their suppliers are getting space in shipping containers. This makes things easier for us to get. But it can also add to the disparity in how long you have to wait if you’re going to Amazon as opposed to going to Etsy and choosing something that’s homemade or going to an individual creator who has used Shopify to set up their own website. So part of what the government can do is say, “Look, we really care about creating a more level playing field. It’s never going be perfectly level, but we want to reduce the disparity because we care about the small producers. And one of the ways that we’re going do that is to invest in the infrastructure that makes it easier for small players to compete, like the post office.” That means ensuring it’s reliable and potentially offering even more subsidized access to it, particularly for small players, instead of saying, “Oh, if you’re really big, you get the favorable discounts and greater access.”

"The underside of the middleman economy," Kathryn Judge says, "grows out of the very characteristics that make middlemen so useful."Harper Business

You write about the joy and connection that comes from participating in direct exchanges like a CSA or buying beer from a craft brewery. But those are often more expensive. What evidence is there that most people could and would pay more for something when they know the producer or when it’s made locally?

A lot of the structures we have now arose when we assumed that all consumers wanted to pay the lowest possible price, holding the quality of the good constant, and that investors cared about absolutely nothing other than risk-adjusted returns. Suddenly people are coming to the table with a much wider set of values and expectations about our roles as consumers and investors.

There are studies showing that consumers will pay more for goods made in an ethical way, but the system is such a mess that it’s hard to infer much from what people actually do. There are a lot of labels, and then there’s a lot of news about how the labels don’t actually mean anything. So I don’t think we can look at buying patterns as indicative of people’s actual revealed preference, because to the extent you’re skeptical about a label, you might be skeptical about who’s really making more money and “Who’s really benefiting from me paying this premium price?” If people had really been able to see the way that [cheap items made in China] impacted workers and the health of a community, they might have been willing to pay a little more, but that fact was made opaque to them by the structure through which they were buying those goods.

But part of what’s interesting about direct exchange is that some of it can reduce cost. Real estate is a great example of how reducing our reliance on middlemen can put more money in the pockets of buyers and sellers.

Indeed, your book points out that real estate commissions are higher here than in other countries. How has that happened?

Real estate agents initially grew in influence by providing a very valuable service. They developed critical infrastructure — namely the Multiple Listing Service. Before the Internet, the MLS made it far easier for sellers to get their home in front of interested buyers and for buyers to quickly learn about the various homes that could suit their needs. The problem is that [the Internet] should make it far easier for buyers and sellers to do much of this without the help of a full-service agent. Yet the fees real estate agents charge haven’t gone down all that much. And agents get paid a lot more when home prices go up, even though they are often doing less work when homes sell quickly. All around, it’s a broken system that costs ordinary Americans a lot of money. But real estate agents and the National Association of Realtors use their control over their MLSs to punish anyone who tries to buy or sell a home in a less traditional way. The NAR and real estate agents have used these advantages, time and again, to ward off competition and to convince lawmakers to adopt rules that protect the current expensive, outdated system. So one possibility might be to actually go in and limit how much compensation can be paid from the seller’s agent to the buyer’s real estate agent. I think we experiment with alternative compensation structures [for real estate agents] and see if the benefits of innovation flow to consumers rather than to the intermediaries.

Everyone knows the phrase “cut out the middleman.” But do you think pandemic-era shortages will make people truly understand the fragility of attenuated supply chains?

We’re at a pivot point. And I think there are signals pointing in both directions. There are some signals suggesting that this could be a moment of real change where we build the system that really serves our needs and doesn’t roll in the exploitation of workers and the environment. There are also signs that very powerful players are working very hard to prop up the existing system. And there’s a possibility that we just fall back into that, because we don’t want to incur the extra effort and policymakers aren’t willing or able to really make an alternative ecosystem more viable.